Section 2(22)(e) deemed dividend that is solely taxable in the shareholder’s hands
Fact and issue of the case
The present appeal has been filed by the Revenue against the order passed by the Commissioner of Income Tax (Appeals)-6, Ahmedabad (in short referred to as CIT(A)), dated 12.5.2015passed under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) pertaining to Assessment Year 2009-10.
The grounds raised are as under:
The Ld. CIT(A) has erred in deleting the addition of Rs. 2,28,53,926/- on account of deemed dividend u/s. 2(22)(e) of the IT Act and disallowance of an interest expenses amounting to Rs.86.829/- by not considering the contents of the deeming provision which clearly states that “any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder being a person who is the beneficial owner of shares holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case posses accumulated profits”.
The Ld. CIT(A) has erred in not appreciating the fact that the assessee is a firm and the partner is a shareholder of the company and has substantial interest in the firm.
Solitary issue in the present appeal relates to the addition made of deemed dividend in the hands of the assessee in terms of section 2(22)(e) of the Act, which was deleted by the ld.CIT(A).
The AO had noted that the assessee had received various sums during the year from one Shree Electromelts Ltd. (“SEL” for short) both from its steel and coke division; that one of the directors of SEL, Shri Ram Krishan Jain, held more than 10% share in the company and 50% partnership in the assessee-firm. He, therefore held that the firm had substantial interest in the company and amount of advance outstanding at the end of the year from two divisions, amounting to Rs. 1,89,08,942/- from coke division and 39,44,984/- from steel division, were treated as deemed dividend in terms of section 2(22)(e) of the Act, liable to be taxed in the hands of the assessee firm. The AO relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. National Travel Services, 202 taxman 327 (Del) in this regard.
Observation of the court
The law as to in whose hands deemed dividend as per section 2(22)(e) of the Act, is to be taxed, has been laid down by the Hon’ble Apex court in the case of CIT Vs. Madhur Housing & Development Company (2018) 93 taxmann.com 502 (SC) wherein they agreed with the order of the Hon’ble High court of Delhi holding that deemed dividend is taxable only in the hands of shareholder. The Hon’ble court agreed with the interpretation of the section by hon’ble High Court that section 2(22)(e ) of the Act only enlarges the definition of dividend and cannot be extended further for broadening concept of shareholder. That where conditions for treating loans and advances as deemed dividend is established by the Revenue, Revenue can treat dividend income in the hands of shareholders. Even the jurisdictional High Court in the case of CIT Vs. Daisy Packers P.Ltd., and the Hon’ble Delhi High Court in the case of CIT Vs. AnkitechP.Ltd. (2012) 340 ITR 14 held that deemed dividend is taxable only in the hands of the shareholder.
The assessee firm in the present case, neither being registered shareholder nor beneficial shareholder as per the factual finding of the ld.CIT(A) which has remained uncontroverted before us, there is no reason to tax the amount received by it by way of advance from SEL amounting to Rs.2,28,53,926/- as deemed dividend in terms of section 2(22)(e) of the Act. The order of the ld.CIT(A) is, therefore upheld, and ground of appeal of the Revenue is rejected.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the Court on 27th October, 2023 at Ahmedabad.
Read the full order from hereACIT-Vs-Kiran-Ship-Breaking-Company-ITAT-Ahmedabad2